No One Buying Footwear in Hurricane

Athletic shoe sales were flat for the week, as higher ASPs offset a unit shortfall.  Look for a rebound this week. If we don’t see it, we’ll be disappointed.


NPD data just released showed flat (+0.3%) top line growth for the week ending September 4. Units were down just over 4%, but higher ASPs entirely offset the shortfall. All said, it was good to see the retailers not cave in on price simply because people were buying power generators, batteries and hunkering down in their homes instead of buying shoes. Look for a rebound this week. If we don’t see it, we’ll be disappointed.


No One Buying Footwear in  Hurricane - FW sales vs. units


Brian P. McGough
Managing Director

Richemont: Less Great


There aren’t many retailers growing the top-line by +29% that Richemont pre-announced this morning, which is even more impressive given last year’s compares, but the fact of the matter is that sales are slowing on the margin. Here some additional takeaways:

  • Take a look at the SIGMA. Sales growth was impressive up +29% on top of +37% growth in the same period last year. While underlying 2Yr sales trends climbed steadily higher across all four regions, Europe was the only region to post sequentially stronger yy sales growth. Incidentally, Europe is also the company’s largest region accounting for ~38% of total sales.
  • While the pre-announcement only highlighted sales trends, keep in mind that input costs (Gold, Silver, etc.) have headed sharply higher up 40%-50% over the last 6-months. With a typical 3-4 month lag embedded in product costs, inventory value is headed higher at a faster rate than top-line sales trends suggest and is likely to result in continued contraction in the sales/inventory spread as well as margins.
  • Importantly, the preannouncement captures the first five months of F12 through August – a month that we feel strongly has seen a meaningful slowdown in high end spending in addition to seeing a backup of diamond inventory in parts of the supply chain.
  • Don’t mistake this as a negative call on Richemont. As was the case with TIF (which raised prices on its engagement ring business by 20%, which alone is 20% of sales) there are company-specific factors that might allow Richemont to wade through any kind of slowdown. But the fact is that this is yet another nugget related to the high-end consumer that we’d call ‘consistently inconsistent, ’ which is a negative divergence from the across-the-board strength we’re accustomed to seeing.


Richemont: Less Great - Richemont 9 11


Richemont: Less Great - Richmt RegSales Trends 9 11





A weekly look at commodity trends pertaining to our space.  Over the last week, dollar strength and concerns surrounding economic growth have helped drive overall commodity prices lower.




Beef prices led the way over the past week, gaining 2.6% along with rice and chicken in what was a muted week for the gainers.  To the downside, Milk led the way with a -12% move and grains, soybeans, sugar, and coffee also declined week-over-week.







Cheese prices stayed flat week-over-week but have declined -17% since August 1st.  Prices have been extremely volatile this year but, for companies that have exposure to cheese prices (like DPZ, PZZA, TXRH, YUM and others), the recent leg down in dairy prices is encouraging.







Below is a selection of comments from management teams pertaining to cheese prices from recent earnings calls.


DPZ (7.26.11): “Given higher than originally anticipated cheese prices, we currently expect our overall market basket for 2011 will increase by 4.5% to 6% over 2010 levels. This was up from our previously communicated range of 3% to 5%.”


HEDGEYE: We recently highlighted the fact that DPZ’s last earnings call took place during a trough in cheese prices and we expected a change in tone from the commentary in early May.  It remains to be seen if cheese prices will remain above 2010 levels for the remainder of the year but CAKE’s guidance for inflation in 2011 recently became much more realistic, although not a sure thing.



TXHR (5.2.11): “We've also got a lot of flow in the dairy markets, in cheese, so there's other things beyond produce that do move around throughout the year.”


HEDGEYE: In 1Q09, TXRH called out favorable beef and cheese prices as being primary drivers of cost of sales being down 126 bps in the quarter.  Cheese was a contributor to a cost of sales increase in 2Q11, as we predicted.  For the remainder of the year, barring another (possible) spike in prices, TXRH could see some margin relief from lower dairy costs.



CMG (4.20.11): “As we move into 2011, we're expanding our use of cheese and sour cream made with milk from cows that are raised on open pastures rather than spending much of their time in confinement, as most dairy cattle do.”


HEDGEYE:  For CMG, the lower levels of dairy costs, if they persist, will offer some food costs relief on the company’s P&L.





Corn and wheat prices have been moving higher over the past couple of months as adverse weather conditions depress sentiment surrounding the upcoming planting season.  Russia increasing its grain exports is offering some relief as crops have been coming in worse-than-expected in the U.S. and Europe.   Besides the strength in the dollar, decreased demand as global economic growth concerns stemming from the accelerating European sovereign-debt crisis is also weighing on grain prices.


One interesting article we read today highlighted that Cropcast, a well-known agricultural weather firm, projected U.S. farmers will harvest 4.3% less corn than last year due to poor weather.  Cropcast cut its output forecast because it expects many acres planted with corn will not be harvested due to flooding around the Mississippi and Missouri rivers and a severe drought in Texas, said Don Keeney, senior agricultural meteorologist for Cropcast.







Below is a selection of comments from management teams pertaining to grain prices from recent earnings calls.


PNRA (7/27/11): “Just to note on the cost of wheat, in 2011 overall, the per-bushel cost will be about the same as 2010 due to our laddering purchasing strategy.”


“We are going to take price in the fourth quarter. This price will offset dollar for dollar the per-bushel inflation of wheat of approximately $3 a quarter that we're going to see in the fourth quarter of this year and then across next year”


“We do continue to expect significant inflationary pressures in 2012, 4% to 5% food inflation, $10 million of unfavorability on wheat costs, which means that we don't expect operating margin much better than flat to full-year 2011 in 2012.”


HEDGEYE:  Wheat costs have come down but it remains unclear whether or not the current easing of grain prices will continue.  Weak global demand and a stronger dollar are currently trumping the adverse impact on supply due to weather and fires in the U.S.  Slowing demand may also mean lower sales for PNRA, so it remains to be seen if margins improve from this effect, even if high wheat costs come down.



DPZ (7/26/11): “We're fairly locked in on our chicken, locked in on our wheat into – partway into next year.”


PZZA (8/4/11): “We're actually covered through Q1 from a contract standpoint. So from a supply chain disruption or even significant price impact we don't anticipate anything between now and the end of the year.”





Beef prices gained by 2.6% week-over-week as unfavorable conditions persist for cattle farmers.  The USDA has rated 90% of the pasture conditions in the Southern Great Plains as very poor.  To make matters worse, as the website CattleNetwork states, most livestock water sources are drying up or have reached a point where water quality is a major concern.  Beef producers are now being faced with a difficult proposition: liquidate the herd or maintain the herd until pastures are – hopefully – renewed in April or May of 2012 and take on the implied cost of feeding the herd with feed prices far higher than a year ago.  The following link walks the reader through the logic of the decision facing producers. [herd liquidation story ]





Below is a selection of comments from management teams pertaining to beef prices from recent earnings calls.


RRGB (8/11/11): “We're still buying ground beef on the spot market… If you recall, we said 5% to 6% commodity inflation on the last call and we dropped that to 5 to 5.5. Again, that's mainly ground beef driving that.”


HEDGEYE:  Live cattle prices are up 22% YoY and, we believe, will continue to be a negative for RRGB’s P&L going forward.



WEN (8/11/11): “That's one of the reasons why as we've talked about our margin guidance, we do not expect to see much relief on beef cost this year.”



Howard Penney

Managing Director


Rory Green





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Some details on Chinese shadow banking



There is an interesting article on “shadow banking”  in China.  See the link below.  We’ve written about this being a potential negative for junkets in Macau.  These “banks” are offering yields higher than those provided by traditional banks and may compete with rates paid by junkets for capital.  Liquidity fuels the junket business and serious competition for capital could have negative implications on junket liquidity. 


Of course, we first started writing about this as a potential risk months ago and junket volumes have only accelerated since.  At this point, it is only a risk factor, but one we are monitoring closely as we continue to analyze weekly Macau data.


Notable macro data points, news items, and price action pertaining to the restaurant space.






Food Retail is has outperformed over the last day, week, and two weeks as Food Processors continue to lag peer food, beverage, and restaurant spaces.


THE HBM: MCD, SONC, CMG, DRI - subsectors fbr




  • MCD Canada is to spend $1 billion to renovate all of its locations in Canada in effort to take market share.  Testing has already proven a success with traffic in reimaged restaurants growing close to double-digits.
  • SONC was cut to “Market Perform” at William Blair. 
  • CMG’s second London location is now open on Baker Street in the Marylebone district.



  • DRI preannounced 1QFY12 EPS at $0.78 versus $0.87 consensus but reaffirmed FY12 EPS guidance of 12-15% EPS growth.  Sales trends were disappointing at Olive Garden in June, July and August (prelim. August number).  See our post from this morning for more details.
  • DRI was cut to “Outperform” from Raymond James versus “Strong Buy”.  The price target was cut to $52 from $62.

THE HBM: MCD, SONC, CMG, DRI - stocks 97



Howard Penney

Managing Director


Rory Green



TODAY’S S&P 500 SET-UP - September 7, 2011


As we look at today’s set up for the S&P 500, the range is 42 points or -1.65% downside to 1146 and 1.95% upside to 1188.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: -1402 (-2155)
  • VOLUME: NYSE 1124.29 (+15.3%)
  • VIX:  37.00 +9.08% YTD PERFORMANCE: +108.45%
  • SPX PUT/CALL RATIO: 1.85 from 2.02



  • TED SPREAD: 32.54
  • 3-MONTH T-BILL YIELD: 0.0254%
  • 10-Year: 2.01 from 1.98    
  • YIELD CURVE: 1.81 from 1.79


MACRO DATA POINTS (Bloomberg Estimates):

  • 7 a.m.: MBA Mortgage
  • 7:45 a.m./8:55 a.m.: ICSC/Redbook weekly sales
  • 10 a.m.: Jolt Job openings
  • 11:15 a.m.: Fed’s Evans speaks in London
  • 11:30 a.m.: U.S. to sell $30b 4-wk bills
  • Noon: DoE short-term energy outlook
  • 2 p.m.: Fed Beige Book
  • 4 p.m.: Fed’s Williams to speak to Seattle Rotary Club
  • 4:30 p.m.: API inventories


  • Yahoo! fired Carol Bartz as CEO, replaced her with CFO Tim Morse on interim basis, starts strategic review
  •  Bank of America shook up its top ranks, ousting wealth-mgmt head Sallie Krawcheck, consumer-banking head Joe Price
  • Constitutional challenges to Germany’s participation in the euro rescue funds were rejected by country’s top court today
  • Anglo American said to decide against takeover offer for MacArthur Coal
  • NY prosecutors said to issue subpoenas to Morgan Stanley as probe of Goldman sale of mortgage-backed products widens: WSJ
  • SEC said to probe effect of ETFs on Aug. market swings: WSJ
  • S&P said to have met with some bond investors before U.S. debt downgrade: WSJ
  • Trial on patent lawsuit by Teva Pharmaceutical over multiple-sclerosis drug Copaxone set to begin today
  • FDA briefing docs due for 9/9 panel on use of bisphosphonates in light of possible link to osteonecrosis of the jaw; makers include MRK, WCRX, Roche, Novartis
  • Saab Automobile applied for protection from creditors today in bid to raise money to restart ops; reorganization process will last at least 3 months, can be extended up to a year
  • AT&T can lower the price it pays for T-Mobile USA if remedies requested by regulators too expensive, people familiar said
  • Google’s Seoul office said to be raided by South Korea’s antitrust regulator as part of probe into whether company unfairly blocked competitors in mobile-search market
  • United Technologies said to receive potential buyer interest for unit Pratt & Whitney Rocketdyne, considering sale: Reuters
  • Archstone said to get acquisition offers from four suitors including Blackstone and Brookfield Asset Management: WSJ
  • Hurricane Katia, now a category 1 storm, continued to move between East Coast and Bermuda; second system advanced west across Atlantic Ocean, may reach Puerto Rico by this weekend
  • No IPOs expected to price today




THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Commodities Rebound as Low Interest Rates May Help Boost Demand
  • Corn, Soybeans, Wheat Advance as Dry Weather May Damage Crops
  • Sugar Rises in New York During Lull Before Crops; Coffee Rises
  • Pawnbrokers Thrive as Rising Gold Price Entices Hard-Up Britons
  • India May Ship Raw Sugar First Time in Four Years on Supply
  • Libya Oil Resumption May Take at Least 18 Months, BofA Says
  • PhosAgro to Renegotiate Indian Accord to Match Prices of Rivals
  • Afghan Hajigak Iron Ore Gets Bids From India, Iran, Canada
  • Aluminum Will Stay in Surplus for Fifth Year, Sumitomo Says
  • Vale Says Sale of World’s Largest Ore Ships ‘Won’t Carry Loss’
  • Whole-Milk Powder Slips to 13-Month Low on Supply Boost
  • Gold Price Retreat May Prolong Bull Run, Top U.K. Investor Says
  • Oil Supply Falls in Survey on Storm, Imports: Energy Markets
  • Coffee Demand Rises on Single-Cup Sales, StudyLogic Data Shows





THE HEDGEYE DAILY OUTLOOK - daily currency view





THE HEDGEYE DAILY OUTLOOK - euro performance





THE HEDGEYE DAILY OUTLOOK - asia performance









Howard Penney

Managing Director



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